SET Monthly Issue May 2017
GUNG HO FOR GLOBAL GROWTH
There are two schools of thought on global investing, and it’s tough to find glaring flaws in either one.
There’s the “why bother?” school. This outlook suggests that US-based companies come with sufficient global exposure to deliver a built-in international reach.
Stocks like ExxonMobil (XOM) and Procter & Gamble (PG) have been doing business in far-flung corners of the globe for more than a century, so large-cap, multinational corporations provide all the upside of global growth you could want.
Then there’s the “spread it around” school.
Supporters of this perspective believe we should look for diversification that doesn’t simply extend beyond our shores, but originates beyond them. The rationale for this is protection against a possible downturn in U.S. markets that is not mirrored by markets overseas.
We’re comfortable with each school of thought. But these days, with American stocks at record highs, we like the idea of additional diversification.
When we recommended Swiss stocks a few months ago, and a buy for the iShares MSCI Switzerland Capped ETF, our primary motivation was safety.
It’s proven to be a sound investment. EWL is up 7% in less than 60 days, after some tough sledding sparked by election uncertainties in France that no longer seem so unnerving.
This month, we’re as safety-conscious as ever, and driven to ladle on more diversification. Our recommendation is The Vanguard FTSE All-World ex-US Index Fund ETF (VEU).
A DUAL FOCUS ON EUROPE AND ASIA
VEU tracks the performance of an FTSE index that measures the return of stocks from developed and emerging markets.
This is the FTSE All-World ex-US Index. It is float-adjusted and market cap weighted. 2,426 stocks from 46 countries make up the index.
The portfolio is closely balanced between European and Asian stocks… on any given day roughly 47% Europe and 43% Asia. (The remainder is North American.)
83.62% of the companies’ stocks tracked by the ETF are in developed markets and 16.38% are in emerging markets.
The Vanguard FTSE All-World ex-US Index Fund ETF steers clear of small cap stocks which suits us just fine. We don’t have to worry about the difficulties of valuing these enigmatic equities given the absence of transparency in some countries and on their exchanges.
This is the classic “China Problem” that will never go away. (If history is any reliable guide, which we believe it is.)
But even China is recently rekindling some lost trust from major investors.
ETF DETAILS
The Vanguard FTSE All-World ex-US Index Fund ETF has been around since 2007.
The fees are what you would expect from Vanguard… low. The net expense ratio is 0.11%.
Net assets are $28.65 billion and the yield is a respectable 2.75%.
THE TOP 5 HOLDINGS
The ETF is highly diversified. As you’ll see, the top five holdings represent less than 5% of the total assets.
Top sectors include financial services, industrials, and consumer cyclical stocks.
| Company Name | Sector | % Weight | |||
| Nestle SA | Food Products | 1.21% | |||
| Roche Holding AG | Pharmaceuticals | 0.98% | |||
| Novartis AG | Pharmaceuticals | 0.92% | |||
| HSBC Holdings PLC | Finance | 0.85% | |||
| Tencent Holdings Ltd. | Technology | 0.76% | |||
| 05/01/17 | |||||
INSIDE THE TOP 5
Nestle SA (Switzerland)
Nestle S.A. is a global food and beverage company headquartered in Vevey. Nestle has been the world’s #1 food company for the past three years.
Roche Holding AG Dividend Right Cert. (Switzerland)
F. Hoffmann-La Roche AG is a global health-care company that operates two divisions: pharmaceuticals and diagnostics.
Novartis AG (Switzerland)
Novartis is a multinational pharmaceutical company located in Basel. It is one of the largest pharmas based on both market cap and sales.
HSBC Holdings PLC (UK)
HSBC is in the banking and financial products and services business. From retail and commercial banking to global private services, insurance, and investments, the financial footprint of the 152-year-old firm is formidable.
Tencent Holdings Ltd. (China)
Tencent is a holding company in the businesses of media, entertainment, payment systems, internet, and mobile phone value-added services. It is the world’s largest gaming company.
PERFORMANCE
The Vanguard FTSE All-World ex-US Index Fund ETF is now trading close to record highs, which would normally concern us.
Here’s why it doesn’t.
We believe that global markets have been undervalued since the 2008 financial meltdown. The combination of two big unknowns, the durability of the European Union and the true health of economic growth in China, has throttled the performance of the ETF.
Hindsight always hurts. It would have been nice to invest in VEU last summer, following the BREXIT vote, but we see ample growth ahead.
We should keep in mind that the moves of global markets can be extreme, quick to both rise and fall. Rarely do we see prices locked into a narrow trading range.
OUR CONCERNS
We’re always a bit skittish about stocks that trade on distant and exotic markets, where oversight can be suspect. The good news is the dominance of stocks from developed markets and more mature exchanges.
There’s also the volatility factor. Over the past days, we’ve seen the following headlines…
China’s Credit Slowdown Poses a Threat to Global Growth
Drop in Canada’s Bank Stocks Is Latest Trouble For This Deal
But there’s not a week that goes by without a bump in the road, it’s the nature of the markets, and bumps are obviously not monopolized by global exchanges and foreign economies.
Here at home, U.S. markets have ample concerns…
U.S. Consumer Spending Flat in March
So when we look at the Asian and European markets, both developed and undeveloped, we are reminded that volatility doesn’t have an exclusive or permanent address. It’s a global consideration, although volatility is harder to find in Zurich than Zanzibar.
So, we’ll spread our wings, diversify, and add some global exposure to the Sector ETF portfolio. We’ll look for improvements in China, an uptick in Europe, and an overall solid performance.
Trade Alert
Buy: The Vanguard FTSE All-World ex-US Index Fund ETF (VEU) up to $50.10
Recent Price: $49.27
Price Target: $62.50
Stop Loss: $36.40
SECTOR SPOTLIGHT
52 WEEK SECTOR PERFORMANCE
| Consumer Discretionary | XLY | +10.79% | |||
| Consumer Staples | XLP | +6.30% | |||
| Energy | XLE | -10.18% | |||
| Financials | XLF | +1.85% | |||
| Health Care | XLV | +9.76% | |||
| Industrials | XLI | +6.30% | |||
| Materials | XLB | +15.41% | |||
| Real Estate | XLRE | -1.82% | |||
| Technology | XLK | +19.15% | |||
| Utilities | XLU | +2.99% |
PORTFOLIO UPDATES
. . . . SPDR S&P Metals & Mining ETF (XME) – BUY
Materials prices have been under pressure lately. We see this as a short-term situation, and the price of the ETF makes this a bargain.
. . . . SPDR S&P Pharmaceuticals ETF (XPH) – HOLD
Pharma stock prices continue to twist in uncertain political winds. The up and down price pattern is likely to continue until we have clarity on federal health care legislation.
. . . . Vanguard REIT ETF (VNQ) – HOLD
Recent economic data which indicates a cooling economy has taken some pressure off the need to increase the pace of interest rate hikes. The ETF has been trading in a narrow range and delivers a dividend yield of 4.42%.
. . . . PowerShares Dividend Achievers ETF (PFM) – HOLD
PFM is now up 10% since our recommendation in November. Current yield is 2.25%.
. . . . First Trust ISE Global Engineering & Construction Index Fund (FLM) – HOLD
The growth of major construction projects in the pipelines of major companies and the volume of contracts being signed is driving this ETF higher. Since our recommendation in October, it is up 12%.
. . . . Vanguard High Dividend Yield ETF (VYM) – HOLD
The ETF has given up ground recently, but is performing well, up 8%. Current yield is 2.79%.
. . . . Utilities Select Sector SPD (XLU) – HOLD
No changes. Continue to hold. This ETF remains a core position.
Portfolio Changes
- Buy Vanguard FTSE All-World ex-US Index Fund ETF (VEU)
Category: SET Monthly Issues
